Other than cold hard knowledge and skills that are required for any forex trader to be successful, there are personality and characteristic traits that are just as crucial.
Everybody wants to make the most amount of money they can by trading in the forex market. That is why we all enter this market after all. Because of this, it would be natural that at some point emotions make their way into our decision making processes.
But we need to know what emotions are mostly involved in forex trading and how they can impact the trading outcome. Are all emotions negative while trading in forex? Or are they certain emotions that can be used to our advantage as traders?
A Good Forex Trader Is Cool as a Cucumber!
Surely you have heard the phrase cool as a cucumber. If you think about it, the reason coolness is being linked to this absolutely boring vegetable is exactly that. It is dull and unemotional. And that is how you should be as a forex trader.
Because a good forex trader needs to be cool and absolutely reasonable in order to make winning decisions. And keep in mind that this goes both ways. We are not merely talking about negative emotions. Even positive emotions can be damaging to your trades.
Generally speaking, fear and greed are the two most common feelings associated with forex trading. While we are going to show you ways to control and harness your emotions in the forex market, let’s discuss these two emotions shortly.
Fear and greed are kind of the two sides of a coin. Imagine you have a position open. If you have done your due diligence prior to opening the position, chances are you get to see your profit from the open position starting to stack up.
Now in this situation, fear can crawl in and force you to close the position prematurely, i.e. sooner than you should. Clearly, in this position you will have profited far less than what would have been eventually available to you.
Vice versa, you could be driven by greed in a similar situation. Not closing your position in the right time could just as negatively impact the outcome of the trade.
In general, here are the most common emotions that traders experience in all financial markets including the forex market:
As you can see, we are painting with a wide brush here. We are talking about both really negative and even really positive emotions. Bottom line is, you need to be as calm-headed as possible if you want to be a millionaire or a billionaire, or attain whatever your goal is of trading in the foreign exchange market.
Now let’s see how you can manage your emotions as a trader.
How to Manage Emotions While Trading in Forex?
In this section we are going to give you some practical and actionable tips about emotion control in forex.
And these tips can be useful for any trader. No matter how professional or even inexperienced you are, you need to learn emotional control and management. Because saying it one thing, but actually doing it is a whole other story. Emotions can take a hold of you without your even being aware.
Here are some proven ways to manage and control emotions in forex:
Don’t think in dollar, think in percentages
One of the ways losses can make you angry or wins can make you overconfidence is thinking about them in terms of their dollar value. One of the best ways to remain logical and reasonable as a trader is to think about your trades in terms of percentages not dollar value. Remember, the goal is to remain objective and not to get emotional.
Prepare a trading plan in advance
Just like a boy scout, a forex trader should also always be prepared. Don’t get into the market out of the blue. Prepare a comprehensive trading plan for yourself. Now this might take a bit of time. You might even want to complete and improve your plan as you trade. But in either case, you need to have a trading plan that accounts for different scenarios and situations so that you are not caught off guard.
Record everything in your trading journal
Get a trading journal and start recording your trades. It requires a lot of patience and perseverance, but even the best traders write down what they do. Keeping a journal of all your trades can help you manage everything more easily. You can pick up on winning patterns and you can also analyze damaging behaviors and wrong decisions as well so as not to repeat them in the future.
Make sure to give yourself breaks
It is very important that you take breaks from time to time. This can give you a clean slate to start again. It is common among traders that they might get tunnel vision if they don’t step back a bit from time to time.
Know when to cut your losses
If you see that a trade is destined to lose, then don’t stick to it longer than you should. Move away from your position no matter what. Learn to accept loss when necessary. This can help keep you logical and it also gives you space to learn from the mistake.
Stop trading if you are angry
The forex market is not a living creature. It doesn’t have emotions. Nonetheless, you might get angry at it from time to time. When you get angry, just stop cold turkey. Anger is almost never productive. No matter what the source of anger is, stop and give yourself time to ruminate, meditate, and think it all out.
Don’t get greedy!
Just like knowing when to cut your losses, you should also know when to step away from the table and just be glad with your win. The ultimate aim of any forex trader is to have a great win to loss ratio. As long as you can manage that, you are going to benefit greatly no matter what. So do not let greed drive your thoughts, because sometimes the bigger you get the harder you fall.
Trade with smaller lot sizes
If you have been on a losing streak or if you do not have enough experience trading, then go toward smaller lot sizes. There are so many brokers out there that offer small lot sizes like mini or even nano. You can trade smaller to build up confidence and more importantly to build up experience. Then you can move on to bigger lot sizes. Also be careful about margin trading, because it might seem very appealing from the outside, but if you are not careful you might get margin called and end up losing more than what you would have otherwise.
Emotions can easily steer your trading ship toward a hurricane and eventual sinking. Although some financial storms in the market are inevitable and out of your hands, you need to remain collected and keep your composure no matter what. By remaining logical you can make the best decisions in the forex market and gain the most profits this way. In this article we talked about the kinds of emotions that are ordinarily involved in forex trading. We also showed you practical ways to attain actual emotional control in forex.